Out-of-State Investor - How to Handle Bad Items on Inspection

[Kyle Steiner]

I'm an investor from California and I am under contract on a 4-plex on a property that is in Tennessee.  I just received the inspection report back and there are some items that give me pause on moving forward.  The market is super hot right now and I have been searching and offering on properties for several months at this point so I am eager to close.  However, I don't want to be stuck with a money pit.  

I want to get bids for the issues identified in the report but contractors are busy and even if I can get one to come out for a bid, it is difficult to let them in to look at the place given that it is 100% occupied. As a result, I don't know if I will be able to get bids for the major items prior to the expiration of my inspection period which is about 10 days from now. 

I really don't know how much all of the big items are going to cost (i.e. roof, plumbing repipe, electrical) and I don't know what is important to fix today and what can be fixed later. Also, if I'm going to fix it later, how much time should I give myself so I know how to calculate a reserve amount each month? I don't want to have a place that is in a state of disrepair but also don't want to break the bank fixing every little thing.

I'm posting here because I want to get others' opinions to find out if I am being too picky.  Also, I'm looking for how others have overcome this problem in their own investing.

Here's some background on the property:

Pros:
Each unit has in-wall A/C units that are fairly new.
All 4 water heaters are less than 4 years old
All 4 electrical panels have been rebuilt
5 minute drive to downtown

Cons:
Built around 1950 so some items are showing their age.
No washer/dryer hookups in unit, no on-site laundry

Minor issues (in my opinion):
Damaged siding
A few small areas of wood rot

Issues I'm concerned about:
Roof:
Roof deterioration - Roof age is 14-16 years
Roof sealant at ridge caps, flashing, and accessories should be resealed
Rafter sag - this caused the roof to sag in certain areas, which my inspector said is typical for older homes that have no collar ties installed.
Attic access was sealed off, caulked and painted over by the current or a previous owner.  There is no way to access the attic without cutting a hole in the ceiling.

Electrical:
Electrical wiring includes copper, aluminum and cloth sheathed.  Electrical is ungrounded as it was not required at the time the property was built.

Plumbing:
Galvanized Pipe used for distribution piping - my inspector says this can contribute to low pressure, rust colored water and may need to be replaced in the near future.
The property still has the original cast iron drain pipes which have an average life expectancy of 40 to 50 years.  According to the inspector, they corrode from the inside out.  The property is about 70 years old at this point.
The water heaters, while not very old, already have rust/corrosion on the top and bottom of the tanks.  I think there might be high humidity in the basement area where they are installed and that they could fail prematurely as a result.

Financial Summary:
I am putting 25% down and will be securing a 30-year fixed mortgage. With current rents, after my fixed expenses (PITI + Property Management), I will have about $675 of monthly cash flow (this assumes no repairs or maintenance), which obviously, there will be repairs needed. The rents can be raised an additional $70 to $100 per unit over the next year or so. After rents are raised (which will probably take $12,000 total in cosmetic renovations) , I'll be around $950 per month positive before capex, repairs and vacancy.

I'm interested to hear everyone's thoughts and advice!

[Marcus Auerbach]

@Kyle Steiner for a building of this age, this is a pretty typical inspection report.

Roof deterioration - Roof age is 14-16 years
Roof sealant at ridge caps, flashing, and accessories should be resealed

The question is how much life is left, three tabs last about 18-22 years, dimensional about 25 to 35 years, depending on weight, quality and installation. If you have less than 3 years left you can make a good case to ask the seller to replace before closing. Caulking with a quality roof sealer like Vulkem is inexpensive.

Rafter sag - this caused the roof to sag in certain areas, which my inspector said is typical for older homes that have no collar ties installed.

How many layers of shingles? The additional weight is an issue, if more than one layer a tear off is in order next time, that will lighten the load. They did not use trusses, but framed roofes on site. Installing additional struts is not that big of an expense.

Attic access was sealed off, caulked and painted over by the current or a previous owner. There is no way to access the attic without cutting a hole in the ceiling.

Not acceptable for inspection, seller needs to give you access. Takes a box knife. You will probably find: low amount of insulation, bathroom vents terminating into the attic instead of outside, otherwise you'll see some mold (not a big deal in an attic, just get it properly ventialted and stop the supply of bathroom moisture)

Electrical:
Electrical wiring includes copper, aluminum and cloth sheathed. Electrical is ungrounded as it was not required at the time the property was built.

Typical for the age, most likely you have BX cables and can use the metal armor for grounding, so all you have to do is swap outlets and tie the neutral to the metal box. Not required, but I would do it.

Plumbing:
Galvanized Pipe used for distribution piping - my inspector says this can contribute to low pressure, rust colored water and may need to be replaced in the near future.
The property still has the original cast iron drain pipes which have an average life expectancy of 40 to 50 years. According to the inspector, they corrode from the inside out. The property is about 70 years old at this point.

The plumbing is past it's design life and sooner or later you have to replace it with pex. Leave it alone until it causes issues like low pressure or multiple leaks. Almost every four family I have ever seen from the 1960 looks like that. Depending on the water quality it could live another decade or so, really seems to vary.

The water heaters, while not very old, already have rust/corrosion on the top and bottom of the tanks. I think there might be high humidity in the basement area where they are installed and that they could fail prematurely as a result.

You should not have to speculate on that; your inspector and agent should be able to clarify that. Any other concerns with the basement? Any water stains in the corners or on the floors, signs of surface water intrusion? If the building has no AC and probably laundry in the basement and moisture is going to be trapped there forever. Could be as easy as running a dehumidifier, which you should do anyway in the midwest. Water heaters life typically around 9-12 years, I have replaced some that made it to almost 20, but they don't build them like that anymore. I pay about $900 installed for a quality unit.

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In summary, it is difficult to give you solid advice without having seen the building in person. The condition seems to be very typical for what I have seen 100 times here in Milwaukee. No real shocker. What you can negotiate depends on the market. If the roof is really in it's final years, ask to have it replaced befroe closing. Get access to the attic and based on what you have found try to negotiate a closing cost credit. All that has to be seen in the context of how good of a price you have it under contract for.

A lot of people like them, but I am not a big fan of four family properties, because the rent per unit is relativley low, giving you a low rent to operating expense ratio, in particular capex, but also PM. The larger the units and the higher the rent per unit, the easier to pay for a new water heater.